Are Mobile Data Caps Really Enemy #1 for Online Education?

by on March 18, 2013 · 1 comment

Benjamin Lennett and Danielle Kehl have an article in the Chronicle of Higher Education that is representative of a genre: worrying about the adverse consequences of mobile data “caps.” In this installment, Lennett and Kehl argue that pricing structures imposed by wireless carriers will limit the future of online education. “As a nation, we should embrace the potential benefits of online education. But we must not ignore the disparities that may keep many from taking advantage of those innovations,” they warn.

But are mobile data caps really what is holding back online education? Let’s take a look.

Lennett and Kehl are mistaken about the nature and pricing of mobile data caps

As any teenager understands, mobile data is not “capped.” Rather, it is priced in “tiers.” Customers can select different tiers of data allowances based on how much data they think they will use. When you overshoot your data allowance, carriers will send you a text and/or email letting you know. You can then choose to keep using data at a higher rate ($15/GB), or you can retroactively upgrade to a higher data allowance, which is more affordable.

Let’s see how these facts comport with the example given by Lennett and Kehl:

Both Verizon and AT&T offer “low cost” plans that bundle unlimited voice and texting with a gigabyte of data consumption for $40 or $50 per month. However, if you tried to stream video lectures on that connection, you’d reach the data cap after about three hours and then face fees of $15 per gigabyte. If you tried to complete a course with 15 hours of video a month, your phone bill could arrive with as much as $70 in extra fees.

In reality, using Lennett and Kehl’s implicit estimate of 3 hours of video per GB, a user would only need to subscribe to a plan that offers 5GB of data rather than 1GB. Instead of spending an extra $70, they could spend an extra $30 to get on a 6 GB plan (using Verizon’s pricing), and have 1 GB to spare to use for browsing the web.

Alternatively, if a user wanted to get as much data as she could for an extra $70/month, she could subscribe to Verizon’s 14GB plan. And in addition to the unlimited voice and texting that Lennett and Kehl note these plans offer, the plans offer free tethering. So when Lennett and Kehl write, “trying to use mobile broadband on your laptop…could be even more expensive,” they are stretching. Free tethering means that using data on a laptop is not more expensive than on a mobile phone.

Lennett and Kehl are mistaken about the nature of competition in the mobile sector

Lennett and Kehl place the blame for the (erroneously construed) high price of mobile data squarely on the lack of competition in the mobile industry:

The high cost of Internet access in the United States and the rise of capped data plans on mobile broadband have a lot to do with limits on competition in the marketplace. The two largest mobile providers, AT&T Wireless and Verizon Wireless, control two-thirds of the mobile market in the U.S.; they have little financial incentive to offer more-affordable plans or bring back unlimited ones when the new capped plans have become so profitable.

Nearly every claim in this paragraph is factually incorrect. The rise of capped data plans has little to do with competition and everything to do with the fact that, for the first time, mobile broadband is fast enough that people can conveniently use a lot of it in a month. A 3G connection can use a lot of data in a month, but it is slow enough that people mostly use it as a supplement to home Internet service. This makes it cost-effective to offer an “unlimited” plan. But LTE, when used 24/7, can consume 6.5 terabytes per month, at speeds that are about as good as most consumers have at home. An unlimited LTE plan, therefore, is much more expensive for carriers to offer, so expensive that they don’t offer them.

It may be true that AT&T and Verizon serve most of the customers in the mobile market, but they compete so fiercely with each other that it seems inapt to use the word “control” to describe their position in the market. Modern economists do not primarily look at the number of firms in the market in order to gauge how much competition there is. A market with as little as two firms can be perfectly competitive depending on the kind of competition in which the firms engage. It all depends on whether firms set quantities or prices. When a firm first sets the quantity of output that it will produce, it has an incentive to restrain output, because it receives whatever fraction of the market that its competitor leaves it. This is known as Cournot competition. But when firms compete on the basis of price first, letting customers select whichever seller offers a cheaper product or service, prices will fall to the competitive level. This is known as Bertrand competition. The mobile market clearly behaves more like a Bertrand market—the maximum number of customers that each firm can handle is not a binding constraint in the competition between the dominant firms—which means that the market behaves competitively, even though there are only two dominant firms.

Finally, it is demonstrably false that AT&T and Verizon “have little financial incentive to offer more-affordable plans.” How do we know it is false? Because plans have become so much more affordable in the past few years. Suppose that you want a plan that offers:

  • Two phone lines, each with unlimited voice and texting
  • 10 GB of shared data
  • Access to shared data on one tablet
  • Unlimited laptop tethering

Today, such a plan costs (on Verizon) $190 per month. While that may seem like a lot, consider what that would have cost as little as 5 years ago. Actually, it’s a trick question, because such a plan was not available 5 years ago, but even the unlimited voice and text for two lines would have pushed $200 per month. Throw in unshared data and tethering charges, and the charges might have been twice as much as we pay today.

So an admittedly rough, back-of-the-envelope calculation shows that mobile prices are falling at a rate of 50 percent per 5 years! How can Lennett and Kehl explain this fall in price? Is it because AT&T and Verizon’s CEOs woke up one morning and decided to be more generous? No, it is because they are competing fiercely to be the first to bring the cost of services down.

Lennett and Kehl are mistaken about the challenges facing online education

Of all of the challenges facing online education, the fact that it remains expensive to pursue an entire college education on a phone does not seem like a serious one. For one, relative to the price of a traditional college education, paying even an absurd amount like $300 in overage charges a month for 48 months would be a bargain. That amounts to $14400, which is less than four years of tuition even at state universities. And of course, for $50 a month or less, users can purchase fixed broadband plans like normal people, for a total cost of $2400 for four years.

Rather than financial, the challenges facing online education are primarily institutional—despite the availability of tons of free online classes, we haven’t yet worked out good labor market practices to reward students who pursue learning online. We also have entrenched interests at both the secondary and post-secondary levels that are resistant to the changes necessary to maximize the gains from moving education online.

By pretending that the cost of mobile broadband is a major challenge for online education, Lennett and Kehl come across as the ultimate concern trolls. The are opportunistically using interest in online ed to pursue their real agenda, increasing federal regulation on the mobile industry. But the case for such regulation is undercut by their clearly mistaken arguments about mobile data caps.

  • Connan Smith

    Wow! Very nice post! Data providers are always the target for most of the arguments You have shed light on false allegations and bought forth the right answers.

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